Public/Private Competition and Collaboration for Non-Inherently-Governmental Work

Transcription

1 Public/Private Competition and Collaboration for Non-Inherently-Governmental Work By: The Honorable Jacques S. Gansler, PhD Professor and Roger C. Lipitz Chair in the Center for Public Policy and Private Enterprise School of Public Policy University of Maryland Collaboration among Government, Market, and Society Forging Partnerships and Encouraging Competition Fudan University, Shanghai, China May 25 26, 2013 Dr. Gansler is a Professor and holds the Roger C. Lipitz Chair in Public Policy and Private Enterprise at the University of Maryland s School of Public Policy; where he also directs (and conducts research in) the Center for Public Policy and Private Enterprise. He is the former Under Secretary of Defense, for Acquisition, Technology and Logistics ( ); and is the author of Democracy s Arsenal: Creating a 21 st Century Defense Industry (MIT Press; June, 2011).

2 Executive Summary The 21st century has ushered in a series of major challenges. The list is staggering, and includes, most importantly, national security; but the other challenges are near equal in importance: health care, energy, environment, education, aging infrastructure, and the fiscal crisis; to name a few. Most, if not all, of these challenges are complex and largely openended. In order to respond to these challenges, federal agencies will need to create solutions, often in areas generally unfamiliar to public entities. As a result, two choices exist (and are described herein): either the federal agencies will need to partner with private and/or non-profit entities (who are selected competitively) to develop and manage these solutions, and to provide the resultant services; or a competition between the public sector and the private sector will be held (wherein, the public sector will be allowed to bid its most efficient organization (MEO) ). Rather than simply privatizing the non-inherently governmental work that has been previously done by government workers. This opportunity for them to bid is considered much fairer. The intent of either of these approaches is to achieve far greater efficiency and effectiveness, by taking advantage of the skills and experience from both the private and public sectors - - and, in all cases, the government still has the ultimate responsibility for the management and oversight of the work being done. An appreciation of the current environment is helpful in understanding the need for greater and more effective government. Significant factors influencing the environment include: rapidly changing information technology, which has altered the nature of work and significantly increased productivity in world-class commercial firms and in federal agencies; domestic economic constraints, that will limit federal discretionary spending, (including defense appropriations); national demographics (specifically, the aging workforce), and their impacts on social security, health care, and the federal workforce; and the increased reliance on private firms to provide support to the military (even in war zones - - for example, in Iraq and Afghanistan there were over 200,000 contractors involved). When faced with these changes, one is inclined to ask what is the proper role of government? The American government has had a long-stated policy that the government will not produce products or provide services that are available in the private sector. However, the population has increasingly asked government, at all levels, to provide more and more services; which, in many cases were historically provided solely by government employees. Beginning in the 1980 s, the assumption that implementation of all government services must be carried out by government workers, has been increasingly questioned. Local governments and federal agencies began competing services between the current government employees and the private sector; and in some cases the work was simply privatized by letting private companies bid for the government capital equipment and the performance of the work (and, in many cases, the employees affected moved to the private sector). As will be shown, these local government initiatives resulted in cost savings ranging 1

3 from 20 percent to 60 percent. This initiative was also adopted at the federal level, with equally dramatic results - -savings averaging approximately 30 percent; with, in many cases, significant performance improvements. In most cases, the government s role has shifted from being the provider of goods and services to becoming the manager of the provider of goods and services. Government employees should continue to perform those tasks identified as inherently governmental tasks. However, non-inherently-governmental tasks should be competitively awarded with the government selected to do those tasks that it can do more efficiently and effectively than the private sector counterparts. This shift allows for the greatest synergism of industry and government. 2

4 Public/Private Competition and Collaboration for Non-Inherently-Governmental Work The U.S. took initial steps at introducing market forces into government in the George W. Bush Administration. Specifically, the President declared: Government should be market-based - - we should not be afraid of competition, innovation, and choice. I will open government to the discipline of competition. Then, the Federal Activities Inventory Reform (FAIR) Act, (February 2001) identified 849,389 not inherently governmental positions for competition (approximately 50% of the 1.7 million eligible federal positions 1 ). This was implemented with the Presidential Management Agenda (2002); which; required competitions for 5% or more of Full Time Equivalent (FTE) slots in FAIR in 2002; then 10% additional competitions in 2003; and, 50% of FAIR by Subsequently, the Office of Management and Budget (OMB) backed off of the quantitative objectives, but not of the intent. It must be emphasized that the critical issue here is competition. (vs. Monopoly) (Not the use of the public sector or the private sector). Competition creates incentives for higher performance at lower costs (vs. public or private monopolies). This approach was termed Competitive Sourcing, and implemented with public/private competitions utilizing OMB circular A-76 procedures - - emphasizing: work that is not inherently governmental; allows the public sector to compete with the private sector for work; and, allows the public and private sector to partner (as a competitive team). The realized benefits (as will be presented below) were: Government very often wins; and better performance at lower costs is realized, no matter who wins. It crates competition in environments that are not normally exposed to market forces; and is a forcing factor for learning with the existing process, as well as for improving the process. In spite of the anticipated- - and realized- - benefits, this introduction of competition met fierce resistance (from unions, Congress, the civilian workforce, and even the military). Although it was seen as a not very efficient process (per a congressionally-mandated A-76 Commission, and general observations by all participants), $5 billion 2 in savings were generated at the Department of Defense alone, between 1997 and So improvements were proposed to OMB circular A-76; including: a 12 month time limit (which can be extended by 6 months); the elimination of direct conversions (when using an accelerated process); the establishment of firewalls (to prevent conflicts of interest); and the use of Best Value for awards. (vs. just low-bid) 3

5 Clearly, the basis for the resistance must be addressed! The six concerns expressed (by those opposed) were: 1. Performance will deteriorate. Industry will focus on profits, not public needs. Industry won t be flexible to changing need (e.g. surges). Government is more experienced in these jobs (so better). 2. Cost will be higher. Government employees are paid less, and they don t charge a fee. 3. Promised saving (for the competitions) will not be realized over time. 4. Small businesses will be negatively impacted. 5. Large numbers of government employees will be involuntarily separated (RIFed). 6. Loss of control by government management. Data exist to address each of these; so I will treat them one by one. 1. Performance will Deteriorate: Actual competitive results emphasized performance improvements 1 st - - then cost savings. Example: NAVAIR Auxiliary Power Unit, Logistics Support Program (public/private partnership, utilizing COTS software) [Caterpillar software, Honeywell management]: Reliability of each carrier-based aircraft s APU has been increased by more than a factor of ten, reliability exceeded guarantees by more than 25%, Dramatic improvements achieved in mean-time-between-failures (mean flight hours between unscheduled removals): 300% on P-3 Platform 45% on S-3 and C-2 platforms For Afghanistan, surged 50% to fill all demands Programs savings are difficult to quantify (since there is no baseline). Competitively-awarded performance-based logistics - - availability and response time comparisons. Material Availability 3 Logistics Response 4 Navy Pre-PBL Post-PBL Pre-PBL Post-PBL F-14 LANTIRN 73% 90% 56.9 Days 5 Days H-60 Avionics 71% 85% 52.7 Days 8 Days F/A-18 Stores Mgmt System 65% 98% 42.6 Days 2 Days CONUS 7 Days OCONUS Tires 81% 98% 28.9 Days 2 Days CONUS 4 Days OCONUS APU 65% 90% 35 Days 6.5 Days Note: Pre-PBL is sole-source government and Post-PBL is competitively awarded (either to private sector or to a public/private partnership) 4

6 Other examples of Performance Improvements 1 st - - then cost savings: U.S. Navy s Sailor Arranged Move (SAM) - - allows sailors to choose their own moving companies vs. being centrally controlled by the Military Traffic Management Command. Customer satisfaction increased from 23% to 95%. Damage claims dropped from one-in-four to one-in-12 moves. British Telecom privatized in Call failures dropped from 1- in- 25 to 1-in-200. Now 96% of public phones work vs. 75%. Indianapolis Waste Water Treatment - - city partnered with private water supply utility. Employee accidents fell 70%; effluent violations fell 86%. In first year of operations, partnership cut costs by 40%; $12.5 million in savings. Competitive sourcing of public transportation transportation authorities awarded contracts to the lowest responsible and responsive provider - - public or private. City Year Performance Improvement Denver Service levels increased 26% San Diego Service levels increased 47% Indianapolis Service levels increased 38% Las Vegas Service levels increased 243% Los Angeles Service reliability increased 300%, complaints reduced by 75% Savings have ranged from 20% to 60%, compared to the costs of non-competitive services replaced. NASA desktop services. Before: NASA s approach had been to use NASA employees to maintain desktop assets. There was no way to track costs, no standardization, and they were not able to track service quality. NASA s Outsourcing Desktop Initiative (ODIN) transferred the responsibility for providing and managing the vast majority of NAS s desktop, server, and intra-center communication assets to the private sector. ODIN Goals were to cut desktop computing costs, increase service quality, achieve interoperability and standardization, and focus NASA IT employees on the core mission. After: Performance (by the winning contractor), exceeded required service levels, service delivery was 98%, availability was 98%, customer satisfaction - -ranges from 90-95%. Hardware/software was standardized at each center. Interoperability and security were much improved. Cost went from no adequate way to allocate IT costs to firm fixed price. The estimated cost savings are 40%. 5

7 2. Costs will be higher, since government employees are paid less and they don t charge a fee. Results of earlier A-76 6 DoD cost comparisons, Competitions Completed Average Annual Savings ($M) Percent Savings Army 510 $470 27% Air Force 733 $560 36% Marine Corps 39 $23 34% Navy 806 $411 30% Defense Agencies 50 $13 28% Total 2,138 $1,478 31% Results of A-76 competitions 7 FY : The DoD completed 314 cost A-76 competitions. 36,987 positions competed, reduced number of positions by 35% to 24,136; 40% of the competitions (49% of the positions) won by the private sector. Majority of wins were by public sector. Results of A-76 competitions 8 FY (prior actual government positions vs. MEO government bids). 6

8 Competitive sourcing 2002 and Jobs contracted out Jobs won in-house Defense HHS 7,826 2,167 1,757 1,210 2,967 positions studied 9,993 positions studied (competed) Interior 968 Overall, for 17,000 Full-Time Positions Competed, 76% Were Won In-House 1,515 2,483 positions studied Competitive sourcing in FY In-house organization won 89% of the competitive sourcing: competitions completed: 662 (570 streamlined, 92 standard): FTE positions competed: 17,595. Results: estimated savings from completed competitive assessments: Gross: $1.19 billion (over three to five years), net: $1.1 billion (over three to five years), annualized gross savings: $237 million DoD competitive sourcing (A-76) demonstrated results : Winning Bidder Number of Competitions Won Civilian Positions Competed (Excluding Direct Conversions) MEO FTEs 12 (Excluding Direct Conversions) % Decrease from Civilian Authorizations to Government MEO FTEs In-House 525 (44%) 41,793 23,253 44% Contractor 667 (56%) 23,364 16,848 28% 13 Total 1,192 65,157 40,101 38% 7

9 DoD savings by size : Size Total Studies 14 Avg. % Savings 14 % with 0 Savings 15 1 to % 37% 11 to % 14% 31 to % 46 to % 9% 76 to % 3% 101 to 150 4% 36 42% 151 to 200 9% 201 to 250 5% 31 41% > 251 0% Total % 22% Results from 2004 IRS competitions: Number of FTEs Competed Winner FTEs Proposed Reduction Area Distribution Centers 400 MEO % Campus Center Operations and Support 278 MEO 60 78% The Government employee MEO won both competitions, with dramatic proposed savings. 8

10 3. Promised saving (from the competitions) will not be realized over time. Center for Naval Analysis study of long-run costs of competitive sourcing 16 : Savings Rate for 16 Completed Activities 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Expected Savings Observed Savings Effective Savings Weighted Averages Expected savings (as bid by winner-government or private) 35% Observed savings (realized results, including scope & quantity changes) 24% Effective savings (realized results on same scope & quantity) 34% Logistics Management Institute: A-76 realized results (on facilities-related maintenance and repair costs 17. Contractor workforces had more than 40% lower costs. With government wins, workforces were not held to stringent cost/performance standards and rarely had to re-compete. $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 $3.95 $4.23 Control A-76 (Government Wins) $2.28 A-76 (Contractor Wins) Conclusion: When government wins, the workforce must meet the cost/performance in the A-76 proposal, and they must regularly re-compete. 9

11 RAND study of realized results (six cases): The expected savings ranged from 41 to 59 percent for contractor wins, and from 34 to 59 percent for in-house wins. RAND found that the contract savings were sustained over time. No cost data was kept for the in-house wins, so direct comparisons could not be made. However, the final headcounts were comparable to the MEO s bid (authorizations are a pretty good proxy for personnel cost). 4. Small businesses will be negatively impacted. Between 1995 and 2001 DoD conducted 784 public-private competitions. 79% of all contracts awarded were to small businesses 18. Additionally, many of the large contracts had requirements for a significant share to go to small businesses as sub-contracts. Examples: Navy-Marine Corps Intranet and NSA Intranet mandated 35% small business subcontracting, (10% must be used for Direct Labor Costs). Advertising competitions on the world-wide-web has significantly increased small business participations. For example, NAVSEA s seaport E-business portal set a goal of assigning 35% of subcontracted work to small businesses. Also, seven of their 20 Multiple Award Contract (MAC) holders were small businesses Large numbers of government employees will be involuntarily separated. GAO examined three A-76 studies 20 : one in-house win, two contractor wins; initially 2190 billets (1079 military and 1111civilian). All military transferred, civilian workforces reduced to 348. Effects of Federal Employees 70.0% 65.5% 60.0% 50.0% 40.0% 26.5% 26% of these took jobs with the contractor 30.0% 20.0% 8.0% 10.0% 0.0% Transferred Voluntarily Retired or Separated Involuntarily Separated 10

12 A CNA study 21 found that DoD programs were very effective in minimizing involuntary job losses. 40% of employees targeted for Reduction In Force (RIFs) from depot maintenance facilities found other DoD or federal jobs; many others were hired by the winning contractor; and others chose to retire. Only 3.4% were actually RIFed. The Department of Interior 22 utilized Smart planning which allowed for 475 positions to be competed without anyone losing their job. Finally, an analysis of almost 1200 DoD competitions demonstrated that only a small percentage (5%) of federal employees were involuntarily separated as a result of competitive sourcing. 23 Winning Bid Involuntarily Separated Retired Transferred to other gov t job Temporary employees terminated Unfilled civilian authorizations Total positions reduced In-House 647 1,893 5, ,846 Contract 2,680 5,373 5,845 1, ,006 ISSA Total positions reduced As % of positions reduced As % of civilian FTEs competed 3,327 7,266 10,974 1,814 1,472 24,852 13% 29% 44% 7% 6% 100% 5% 11% 16% 3% 2% 38% 6. The government will lose control. The greatest impediment to privatization by contracting is the fear of loss of control [by government managers] 24. In reality, the senior government managers now have far greater control. They can use the competitive market to reward or replace, based on measured performance and costs (vs. their lack of control - - or visibility - - in the presence of a government monopoly). But, the government still has the full responsibility to manage the contract and the contractor (or they will lose control). In summary, while the 6 old perceptions still persist: 1) Performance will deteriorate. 2) Using government employees will cost less. 3) Promised cost savings (from the competition) won t be realized over time. 4) Small businesses will be negatively impacted. 5) Large numbers of government employees will be involuntarily separated (RIFed) and 6) Loss of control by government management. The empirical data refute all six of these perceptions. So, the message is: Smart competition (where properly applied) will have huge payoffs (from the incentives created) in higher quality, better performance, and cost reductions - - so it should be fully utilized! In 2004, the Federal Acquisition Council (FAC), with OMB, published a best practices guide 25 to help agency officials manage their competitive sourcing efforts in the most strategic and results-oriented manner possible. The guide finds that competitive sourcing works best when agencies: conduct thorough preliminary planning and strategically, group-related activities; take advantage of competition to reorganize and enhance the efficiency of in-house 11

13 activities; link competitive sourcing decisions to human capital considerations; utilize tailored management tools to keep managers focused on results; and seek the assistance of able contractors to provide technical support and business acumen. But, in spite of the results achieved, Congress (in 2009) stopped allowing A-76 (public/private) competitions. The reasons were: opponents are highly proactive (Congress, Government Unions, and Current Employees); there was limited analysis, and even that receives low visibility; and there was little education and training available. Clearly, more education and research needs to be done on government efforts to outsource, competitively source, privatize, and form public-private partnerships to; greatly improve the process (in both time and costs); collect and analyze lessons learned; develop a comprehensive data base of realized results; provide guidance on the best approach (i.e. competitive sourcing, privatization, outsourcing, public/private partnership, etc.) for each application; identify the most effective strategies to train for, plan, and conduct successful competitions, transitions, and subsequent management; and, analyze best practices and available tools for achieving soft landings for government workers impacted. The keys to doing more for less are innovation and incentives. Innovation is a driver of significant change, for gains in effectiveness and/or efficiency - - could be in technology, or in process; but (most important) in thinking (i.e. a culture change ). The greatest incentive for innovation is competition. For a culture change two things are required: 1.Widespread recognition of the need for change. 2. Leadership - - with a vision, a strategy, and a set of actions. For U.S. government acquisitions, the recognition of the need for change is coming from: the declining budget; and the realization that superior performance, at lower cost, is being demonstrated every day in the competitive commercial world. Results show that, no matter who wins the public/private competition, performance has improved and the cost savings average at least 30%. Acknowledgment The author is deeply indebted to William Lucyshyn, the Director of Research at the Center for Public Policy and Private Enterprise at the University of Maryland s School of Public Policy. Additionally, I want to thank Valerie Kwiatkowski for her support with the manuscript. Finally, I want to acknowledge that the research on which this paper is based was partially supported by CGI. 12

14 Endnotes 1 Many areas were defined by agencies as not included in the Federal Activities Inventory Reform (FAIR) Act (e.g. military positions in jobs that were not inherently governmental. ) Thus, this excludes 320,000 DoD jobs being done by military, but are eligible for competitive sourcing (as of 1/26/04) 2 Government Executive, March 31, Klevan, Paul, NAVICP, UID Program Manager Workshop Briefing, 5 May Kratz, Lou, OSD, Status Report, NDIA Logistics Conference Briefing, 2 March Source: E.S. Savas Privatization and Public-Private Partnerships (Chatham House, 2000) 6 Defense Reform Initiative Report, Nov Source: DoD CAMIS Data 8 Source: DoD CAMIS Data 9 GAO report, Competitive Sourcing GAO , Feb Source: OMB Report on Competitive Sourcing Results FY 2003, May Competitive Sourcing: What Happens to Federal Employees? Jacques S. Gansler and William Lucyshyn, October MEO= Most Efficient Organization (as proposed by government workers) 13 Even for the competitions won by the contractor, the MEOs proposed decreases of 28% in the FTE headcount 14 Anne Laurent, Award-Winning Acquisition, Government Executive Magazine, Annual Procurement Preview, August Trunkey R. Derek, Robert F. Trost, Christopher M. Snyder, Analysis of DoD s Commercial Activities Program, Center for Naval Analysis, Dec 1996 (Note: This study had a slightly different data base, over the same time period) 16 Long run Costs and Performance Effects of Competitive Sourcing CAN, February LMI Insights, Fall Michael Wynne, Principle Deputy, USD (AT&L) 19 David C. Weld, SeaPort: Charting a New Course for Professional Services Acquisition for America s navy, IBM Endowment for the Business of Government, June Effects of A-76 Studies on Federal Employees Employment, Pay, and Benefits Vary GAO , march CNA Report CAB 96-62, Case Studies in DoD outsourcing, Jan Government Executive, March 31, Gansler & Lucyshyn, IBM Center for the Business of Government Report, Competitive sourcing: What Happens to Civilian Employees, Oct Based on the multiple surveys at the state and local level (F.S. Savas, Privatization and Public Private Partnership, Chatham House, 2000, p FAC/OMB, Managers Guide to Competitive Sourcing, February 20, 2004